The graphite electrode shortage could last five years or more, investment bank Jefferies said in a report Wednesday after spending time with management of Japanese producer Tokai Carbon.
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Jefferies said 10% of needle coke output is now being directed to the lithium-ion sector and anode material production requires the same facilities as graphite electrode production. It also said Hurricane Harvey had taken some needle coke capacity offline.
The natural growth in electric arc furnace-based output at the expense of blast furnace production, led by a drive to reduce pollution, would trigger stronger demand for electrodes, Jefferies said.
The bank raised its price assumption to $6,000/mt for graphite electrodes, up from $5,000/mt previously.
Jeffereis said investors were underestimating graphite electrodes' role as a "reflationary driver of steel prices" and the impact of the electrode squeeze on market supply and demand fundamentals.
Mills would attempt to pass on the increases, Jefferies said, alluding to the graphite electrode surcharges some stainless producers had already implemented.
"Ahead of 2018 contract renegotiations, most contracts expect 2-4x appreciation for Western steelmakers implying a ~$24/mt hike in the cost of EAF-based steelmaking," Jefferies said in the report, led by equity analyst Seth Rosenfeld.
"We expect steelmakers to mitigate this cost pressure by adjusting raw materials mix as prime scrap, pig iron and scrap alternatives DRI/HBI reduce electrode consumption given faster melts and shorter heats," Jefferies said.
"While US steel prices may be supported by rising GE costs, scrap prices may fall due to weak export demand, removing a key cost support for steel prices," the bank added.
The US exports around 21% of scrap production, with Turkey the primary buyer.
Jefferies said Turkish mills are more exposed to spot electrode prices -- now around $30,00/mt from China and India -- which was making US material unattractive.
"Weakness in the Turkish Lira will only further impair demand for imported materials," it said.
Axiom Capital, in a note Wednesday, agreed scrap prices could come under pressure from the electrode shortage.